Where to Put Your Short-term Savings

What kind of savings account is best for money you might need to get to?

You have money that you may need to get to. Maybe it’s money in an emergency fund. Maybe it’s savings that you just don’t feel comfortable locking up for one reason or another. At the same time, you’d like that money to do a little something for you rather than just sit there. Here are some options and ideas to consider.

I’ll-absolutely-need-to-get-to-it money

This is usually that emergency fund money. We call it money for the speedbumps in life. It’s the cash you’ll need to get to if something happens, like getting the furnace fixed or repairing your car’s alternator so you can get to work. Typically, we should have $1,000 set aside for stuff like this.

It’s too easy to leave this money in your checking account. There are a couple problems with that. First, if you don’t have a checking account that really pays, your money could be sitting there doing very little or nothing at all for you. Second, it’s too easy to accidentally spend that emergency fund money when it’s in your checking account. Or to tell yourself that it’s okay to spend it because you’ll replace it later. Unfortunately, emergencies have this funny habit of showing up after you’ve spent that money and before you’ve had a chance to replace it.

Your best bet is to put your absolutely-need-to-get-to-it money into a separate account. Here are some options:

  • Open a separate high-interest checking account - this gets the money out of your everyday checking account and gets it earning some interest. One caveat - most of these checking accounts require you to do a few reasonable things, like making a certain number of debit card transactions during the month, accepting e-statements, and logging onto online banking.
  • Open a high-interest savings - another option is to send that emergency fund money to a high-interest savings account that is linked to your checking account. This helps put your money to work, and the linking makes transfering money into your savings easy. You could even automate it to make it all a no-brainer.
  • Open a money market account - a third option is to open a money market account for your emergency savings. They often pay more than a simple savings account, but these types of accounts usually require a little bit larger minimum balance to avoid fees, and they limit your access to 6 withdrawals per month (before you have to pay a fee to get to your money.)

With each of these three options, your money is FDIC insured (up to $250,000 in each account). And getting to your money is easy. You can use a debit card to pay for that emergency, or get cash from an ATM. Make sure you choose an account that gives you free access to nationwide ATMs, because you never know where an emergency might happen.

I-may-need-to-get-to-it money

After you have your emergency fund, it’s a good idea to take that next step and build up your savings to handle any of life’s detours. This is money that helps you get through something like a job layoff or a major medical bill. A good rule of thumb is to stash away 6 months worth of salary.

You’ll most likely need money right away if something happens. And you may need to get to more or all of your money depending on the detour.

One strategy is to use a combination of accounts. For example, say you have 6 months of salary saved up. You could put 2 months of it in a checking or savings account like we mentioned above. The other 4 months worth you could put in a money market account (which typically earns more but requires a larger minimum deposit and has limits on how often you can withdraw). If your setback lasts more than 2 months, you can transfer money from your money market account to your checking or savings account.

This solution helps you get more out of your money while giving you the access and security that keeps anxiety low.

Find the combination that’s right for you.

Everybody has different needs. Some will only feel comfortable if all their money is in a savings account. Others may want to use a combination of accounts - maybe even adding in a certificate of deposit (CD) to potentially earn a little more on money they may be comfortable locking up for 6 or 12 months (or more). The key is to find the right combination of earning power and access that makes you feel comfortable. Because when you feel comfortable, it easier to build the savings you need for whatever life throws at you.

For more on saving to emergency proof your life, check out our emergency proof ebook.

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